RBS turns the page on the fi­nan­cial cri­sis, but not so the Bank of Eng­land

The Sunday Telegraph - Money & Business - - Business - JEREMY WARNER

When Sir Howard Davies was ap­pointed chair­man of Royal Bank of Scot­land nearly three years ago, it was with the pur­pose of ad­dress­ing five legacy is­sues which were stand­ing in the way of re­sumed div­i­dend pay­ments and the Gov­ern­ment’s abil­ity to sell down its 70pc stake. Last week’s $4.9bn set­tle­ment with the US Depart­ment of Jus­tice re­moves the last of those ob­sta­cles. So it’s job done and well done.

The Gov­ern­ment needs to move fast in cap­i­tal­is­ing on this mo­ment. A Cor­byn-led Gov­ern­ment is look­ing less likely by the week, but it’s a risk none the less; Labour has vowed to keep RBS in pub­lic hands, buy­ing out the mi­nor­ity by sell­ing off a num­ber of as­sets, in­clud­ing Coutts, the Queen’s bank. The more of RBS the Trea­sury man­ages to sell off, the less af­ford­able this out­right na­tion­al­i­sa­tion be­comes.

As things stand, the Gov­ern­ment’s stake is worth around £24bn, lit­tle more than half the £45bn of pub­lic money used to keep the bank afloat. Even adding back the £6bn the Gov­ern­ment creamed off RBS via the so-called “as­set pro­tec­tion scheme”, that’s quite a loss to the pub­lic purse.

All the same, sale of the stake will fi­nally turn the page on one of the most hu­mil­i­at­ing chap­ters in UK fi­nan­cial his­tory. Banks to­day are much stronger than they were in the run up to the fi­nan­cial cri­sis. The last Bank of Eng­land as­sess­ment stress tested the bank­ing sec­tor against an eco­nomic catas­tro­phe of pos­i­tively bib­li­cal pro­por­tions, and even RBS passed with fly­ing colours. So it’s a mo­ment to savour; for the banks at least, the fi­nan­cial cri­sis has fi­nally moved into the realms of his­tory.

Car­ney’s suc­ces­sor

Not so for mon­e­tary con­di­tions, where in­ter­est rates are still set as if still in the midst of the mael­strom. The Bank of Eng­land missed a trick in not rais­ing in­ter­est rates when ex­ter­nal con­di­tions in the world econ­omy war­ranted it six months to a year ago. Back then, the econ­omy could eas­ily have weath­ered a 1 per cent bank rate. Now we’ve hit an­other soft patch and with Brexit un­cer­tain­ties deep­en­ing, the chance may have gone.

It must all be a bit dispir­it­ing for Mark Car­ney, Gover­nor of the Bank of Eng­land. His sig­na­ture “for­ward guid­ance” pol­icy was a damp squib, his warn­ings over Brexit fell on deaf ears, and with lit­tle more than a year to run on his con­tract he’s failed to nor­malise mon­e­tary pol­icy as hoped. This is no crit­i­cism of the job he’s done; there have been no ob­vi­ous mis­takes ei­ther, which in cen­tral bank­ing is in it­self an achieve­ment. But mar­kets are fickle, and they now ap­pear more in­ter­ested in who might re­place him than any­thing he’s got left to say.

So here’s an out­ra­geous sug­ges­tion that only half in jest has been floated in Gov­ern­ment – for­mer French fi­nance min­is­ter and cur­rent man­ag­ing di­rec­tor of the In­ter­na­tional Mon­e­tary Fund, Chris­tine La­garde.

OK, OK, so even if she could be per­suaded, she would be com­pletely un­ac­cept­able to Brex­i­teers. On the other hand, she would, as an ex­em­plar of “global Bri­tain”, be ex­cep­tion­ally use­ful to the UK in a post Brexit world. Few if any are as well con­nected in­ter­na­tion­ally, and she would help re­build bridges with Europe. It’s a long shot, but stranger things have been known.

Bad pol­icy sug­ges­tion

On the whole, I’m a fan of the Res­o­lu­tion Foun­da­tion and its chair­man, the for­mer Tory gov­ern­ment min­is­ter, David Wil­letts. But Res­o­lu­tion is also a clas­sic ex­am­ple of O’sul­li­van’s law – that any think tank which is not overtly right wing will over time be­come left wing.

With that in mind, I’d like to add my penny’s worth to the tsunami of de­ri­sion which has been heaped on the rec­om­men­da­tions of its “In­ter­gen­er­a­tional Com­mis­sion”. I don’t want to ar­gue there isn’t a prob­lem, but the causes of in­ter­gen­er­a­tional un­fair­ness are many and com­plex; they can’t be ad­dressed with sim­plis­tic so­lu­tions.

That mil­len­ni­als re­ceive a £10,000 hand­out on their 25th birth­day is quite the most ridicu­lous idea ever to have come out of a think tank; I’m amazed that peo­ple of the cal­i­bre of Paul John­son, di­rec­tor of the In­sti­tute for Fis­cal Stud­ies, and Carolyn Fair­bairn, di­rec­tor gen­eral of the CBI – both mem­bers of the Com­mis­sion – could have put their name to such a silly rec­om­men­da­tion; it would cost an arm and a leg, it would make lit­tle dif­fer­ence to stu­dent debt, it is woe­fully short of what’s needed for the de­posit on a house, and is an­other un­fair­ness to ex­pect older work­ers on rel­a­tively low earn­ings to sub­sidise hand­outs which would in many cases end up fund­ing booze-fu­elled hol­i­days in Thai­land. There is a good place for this re­port; in the waste bin.

Ital­ian farce

Why so san­guine? The pop­ulist pol­icy agenda of the new coali­tion gov­ern­ment in Italy would in any nor­mal cir­cum­stances be enough to send mar­kets into melt­down. Here is a small taste of what the Five Star/ League combo has in mind; a flat rate tax, a ci­ti­zens al­lowance for the im­pov­er­ished south, a gen­eral rolling back of pen­sion re­form, restor­ing the re­tire­ment age to 60, and the es­tab­lish­ment of a par­al­lel cur­rency as a pre­cur­sor to leav­ing the euro. Yet panic was there none. Yields on Gov­ern­ment bonds barely changed and the stock mar­ket ac­tu­ally went up.

The ex­pla­na­tion lies partly in the idea that the pop­ulists will in time be do­mes­ti­cated, as Syriza was in Greece. Ital­ian Gov­ern­ments come and go with star­tling reg­u­lar­ity, but noth­ing much ever changes; it’ll be the same this time, mar­kets as­sume. And it is also be­cause when you drill down into the de­tail of the pol­icy agenda, it is not as fis­cally in­con­ti­nent as it seems.

Even so, it is over­whelm­ingly likely that mar­kets are un­der­es­ti­mat­ing the risks, both to Italy and the con­tin­ued in­tegrity of the euro. Com­pla­cency in the face of an ob­vi­ous threat is a clas­sic, late bull mar­ket con­di­tion. And here we have it in spades.

Hand­ing out £10,000 to mil­len­ni­als would cost an arm and a leg and make lit­tle dif­fer­ence to stu­dent debt

Mov­ing for­ward: The $4.9bn set­tle­ment is an­other ob­sta­cle re­moved to al­low­ing the gov­ern­ment to sell

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